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GAO-11-609R:
United States Government Accountability Office:
Washington, DC 20548:
July 12, 2011:
The Honorable Kay Bailey Hutchison:
Ranking Member:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Ralph M. Hall:
Chairman:
The Honorable Eddie Bernice Johnson:
Ranking Member:
Committee on Science, Space, and Technology:
House of Representatives:
The Honorable Bill Nelson:
Chairman Subcommittee on Science and Space:
Committee on Commerce, Science, and Transportation:
United States Senate:
Subject: NASA Needs to Better Assess Contract Termination Liability
Risks and Ensure Consistency in Its Practices:
The National Aeronautics and Space Administration (NASA) procures most
of its goods and services through contracts, and it terminates very
few of them. In fiscal year 2010, for example, NASA's procurements,
ranging from small contracts for human resources consulting services
to multimillion dollar contracts to build and operate spacecraft,
totaled approximately $17.4 billion, representing about 83.4 percent
of the agency's obligations that year.[Footnote 1] That same year, it
terminated 28 of 16,343 active contracts and orders[Footnote 2]--a
termination rate of about .17 percent. This rate is about the same--
less than 0.2 percent--for each of the past 5 fiscal years.
NASA contract terminations--the complete or partial cancellation of
work under a contract before the contract's period of performance
ends--are rare but could become more common in the future. The federal
government is facing real fiscal limitations and will have to make
difficult choices about upcoming priorities. This reality makes it
more important than ever that NASA manage its projects as efficiently
and effectively as possible and within its budget. This is a struggle
for NASA. Our work has shown that NASA's large-scale projects tend to
cost more and take longer to develop than planned.[Footnote 3] In this
time of calls for greater fiscal austerity, NASA recognizes that it
has to operate within its budget and that its projects must be
affordable and sustainable over the long term. If NASA cannot address
some of the issues that have led to cost and schedule growth for its
projects in the past, tough decisions may need to be made about
whether or not to start new projects or which projects to terminate,
as additional funding could be scarce.
As demonstrated by the proposed cancellation of NASA's Constellation
program, a program that we have reported to be at risk of not meeting
cost and schedule goals, the cancellation of a project can have
potentially significant financial impacts.[Footnote 4] After the
President proposed canceling the Constellation program in his fiscal
year 2011 budget request, NASA reported that the agency's costs
associated with terminating the various Constellation program
contracts could reach close to $1 billion. As we reported previously,
responsibility for these potential costs became an issue between NASA
and its Constellation contractors.[Footnote 5] The questions about
responsibility for potential termination liability costs, coupled with
the Constellation program's constrained budget profile, led to
disruption in work activities at some contractors.[Footnote 6]
Because of these questions regarding responsibility for potential
termination liability costs and the impact they could have on NASA's
ability to execute its projects effectively, you asked us to assess
NASA's policies and practices pertaining to the management and funding
of contract termination liability, as well as interactions between the
agency and its contractors related to termination liability.[Footnote
7]
To evaluate how NASA manages termination liability, we identified all
NASA projects that were in the development phase and had active
contracts. Since such projects were still in development, they could
represent potential termination costs to NASA in the event that they
are terminated. Specifically, we identified and selected 13 projects
from NASA's Science Mission Directorate because this directorate has
the largest number of projects in development. We eliminated all
projects that were managed by the Jet Propulsion Laboratory because it
is a federally funded research and development facility managed for
NASA by the California Institute of Technology. We excluded major
projects in the Exploration Systems Mission Directorate because we had
previously reported on the contracts associated with Constellation
program. For the 13 projects that met our criteria, we collected and
analyzed 14 associated contracts and their Contractor Financial
Management reports and funding modifications for fiscal year 2010 (see
table 1).
Table 1: NASA Projects and Contracts Reviewed:
NASA project: Gravity and Extreme Magnetism Small Explorer;
Primary contractor: Orbital Sciences Corporation;
Contract purpose: Spacecraft and mission operations;
Contract type: Cost reimbursement.
NASA project: Glory;
Primary contractor: Orbital Sciences Corporation;
Contract purpose: Spacecraft and mission operations;
Contract type: Cost reimbursement.
NASA project: Global Precipitation Measurement;
Primary contractor: Ball Aerospace and Technologies Corporation;
Contract purpose: Microwave imager instrument, instrument integration
on spacecraft, launch and post-launch support;
Contract type: Cost reimbursement.
NASA project: Interface Region Imaging Spectrograph;
Primary contractor: Lockheed Martin Space Systems Company;
Contract purpose: Construction, integration and testing of spacecraft;
Contract type: Cost reimbursement.
NASA project: James Webb Space Telescope;
Primary contractor: Northrop Grumman Aerospace Systems;
Contract purpose: System integration;
Contract type: Cost reimbursement.
NASA project: Landsat Data Continuity Mission;
Primary contractor: Orbital Sciences Corporation;
Contract purpose: Spacecraft;
Fixed price, incrementally funded.
NASA project: Landsat Data Continuity Mission;
Primary contractor: Ball Aerospace and Technologies Corporation;
Contract purpose: Instrument (operational land imager);
Contract type: Cost reimbursement.
NASA project: Mars Atmosphere and Volatile Evolution Mission;
Primary contractor: Lockheed Martin Space Systems Company;
Contract purpose: Spacecraft and mission operations;
Contract type: Cost reimbursement.
NASA project: Magnetospheric Multiscale;
Primary contractor: Southwest Research Institute;
Contract purpose: Phase A investigation on instrument suite;
Contract type: Cost reimbursement.
NASA project: NPOESS Preparatory Project;
Primary contractor: Ball Aerospace and Technologies Corporation;
Contract purpose: Spacecraft and instrument integration;
Contract type: Fixed price, incrementally funded.
NASA project: Radiation Belt Storm Probes;
Primary contractor: Johns Hopkins University Applied Physics
Laboratory;
Contract purpose: Spacecraft and mission operations;
Contract type: Cost reimbursement.
NASA project: Space Environment Testbeds;
Primary contractor: Arizona State University;
Contract purpose: Development of space-based test platform;
Contract type: Fixed price, fully funded.
NASA project: Stratospheric Observatory for Infrared Astronomy;
Primary contractor: L-3 Communications Integrated Systems;
Contract purpose: Engineering expertise and certification support;
Contract type: Cost reimbursement.
NASA project: Solar Probe Plus;
Primary contractor: Johns Hopkins University Applied Physics
Laboratory;
Contract purpose: Spacecraft design and production;
Contract type: Cost reimbursement.
Source: GAO presentation of NASA and contractor data.
[End of table]
We also analyzed e-mails and correspondence between NASA and its
contractors regarding potential termination liability. We interviewed
NASA contracting officers and representatives from contractors for
each of the contracts selected and also interviewed NASA termination
contracting officers, financial managers, resource analysts, and other
procurement officials. We also relied on interviews conducted during
our previous work on the proposed termination for the Constellation
program. We reviewed the Federal Acquisition Regulation (FAR), NASA's
FAR supplement, and a variety of NASA and contractor documents. We
used the Federal Procurement Data System-Next Generation to determine
how many contracts and orders were terminated within each fiscal year
from fiscal year 2006 to 2010. (See enclosure I for additional
information on our scope and methodology).
We conducted this performance audit from July 2010 to July 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Results in Brief:
NASA's policy on management and funding of contract termination
liability is to rely on the FAR's limitation of funds or limitation of
cost clauses, which act as a mechanism to limit the government's
liability in the event of a contract termination to the amount of
funds currently allotted to a contract.[Footnote 8] We found that
NASA's acquisition professionals generally do not monitor or track the
potential termination liability costs of its contractors nor does the
FAR require them to do so. The agency has not issued detailed
instructions or provided guidance to direct contracting officers and
others on how to monitor or track termination liability and to
supplement the reliance on the relevant FAR provisions. As a result,
resource analysts and financial managers inconsistently monitor and
fund potential termination liability across the projects we reviewed.
According to NASA acquisition professionals, contractors are
ultimately responsible for tracking their potential termination
liability and ensuring that they reserve sufficient funds to cover any
potential termination liability out of funds that NASA allots to the
contract. Several contractors reported that their potential
termination liability was covered in their allotted funds, while other
contractors reported that NASA did not provide sufficient funds to
cover potential termination costs. In some cases, NASA contractors
said they did not view insufficient potential termination liability
funding as a risk because NASA's past practice on contract
terminations was to provide additional funding to the contract to
cover the agreed-upon termination settlement costs and they assumed
this would be the continuing NASA practice. While allowed under the
FAR, NASA's inconsistent practices for funding potential termination
liability costs can still have negative consequences for NASA's long-
term relationships with its contractors, especially if the agency
decides to terminate a major project. Moreover, as the federal
government deals with its fiscal limitations, NASA's contractors may
perceive contract termination as a greater risk in the future and may
be less willing to continue contract performance without full funding
of their potential termination liability.
We are recommending that the NASA Administrator review the agency's
current practices regarding termination liability and, as appropriate,
establish guidance to ensure consistency among NASA's projects.
Background:
The federal government can stop a contractor's performance under a
government contract before the full period of performance ends by
terminating the contract. Depending on the circumstances, the
government can completely or partially terminate the contract for the
convenience of the government or for default. For example, when the
government's requirements change, rendering continued performance
unnecessary, the government may choose to terminate the contract for
convenience. On the other hand, when a contractor fails to perform its
contractual obligations, the government may terminate the contract for
default. Generally, when a decision is made to terminate a contract
for the convenience of the government, the contracting officer will
notify the contractor to stop work under the terminated portion of the
contract and begin assessing its termination costs and developing a
termination settlement proposal for those costs, among other things.
For a termination for convenience, termination costs generally include
the expenses associated with ending a contract, such as preparing a
settlement proposal, negotiating with subcontractors, and disposing of
inventory.The FAR delineates which contract termination costs are
generally allowable.[Footnote 9][Footnote 10]. Under the FAR, the
contractor has 1 year to submit to the government a settlement
proposal, consisting of the contractor's incurred costs up to the
point of termination, award or fee, as appropriate, and termination
costs.
The FAR's "limitation of funds" and "limitation of cost" clauses limit
the government's liability by establishing a ceiling amount that the
contractor may not exceed (except at its own risk) without instruction
from a contracting officer during contract performance.[Footnote 11]
The limitation of funds clause applies to cost reimbursement contracts
that are incrementally funded where funds are obligated only to cover
the amount currently allotted to the contract and any corresponding
increment or fee. The limitation of funds clause limits the
government's liability at the not-to-exceed amount that has been
allotted to the contract.The limitation of cost clause is for fully
funded cost reimbursement contracts where funds are obligated to cover
the estimated cost and any fee and the clause limits the not-to-exceed
amount to the total estimated cost of the contract.
Eleven of the 14 contracts we reviewed were incrementally funded cost
reimbursement contracts, and, in general, cost-type contracts require
the government to reimburse the contractor for allowable costs
incurred in performing the contract, to the extent prescribed in the
contract. Under the limitation of funds clause, when the contractor
expects that the costs it will incur in the next 60 days of
performance will exceed 75 percent of the total amount currently
allotted to the contract, the contractor must notify the contracting
officer.[Footnote 12] Additionally, under the clause, 60 days before
the end of the period specified in the contract, the contractor must
also notify the contracting officer of the estimated amount needed to
continue performance under the contract or for any further period
specified in the contract's schedule or otherwise agreed upon. At that
time, the contracting officer can instruct the contractor to stop work
and wait for further instruction, allot additional funds to continue
performance, or terminate the contract. If the contractor continues to
incur costs without instruction from the contracting officer, then it
is doing so at its own risk; in accordance with the limitation of
funds clause the government is generally not obligated to reimburse
the contractor for any costs in excess of the total amount allotted by
the government to the contract. The contractor's estimated costs over
a specified time, therefore, should include its estimated potential
termination liability in addition to the costs the contractor expects
to incur for performance. If the estimated potential termination
liability is not tracked by the contractor and those costs exceed the
total contract funding allotment, then the contractor risks those
costs not being reimbursed in the event of termination, in accordance
with the limitation of funds clause. The government may still choose
to pay the contractor the agreed-upon termination settlement costs,
however, even if the costs are in excess of the total amount allotted
to the contract as long as sufficient funds are available. When the
total funding allotment is being used to reimburse contractor
performance costs without any part of the allotment being reserved by
the contractor for potential termination costs, then the government is
receiving more contractor performance under a particular funding
allotment.
Contractor estimates of termination liability may continually change
as the contract progresses because the amount of potential termination
liability costs depends, among other things, on the type of work being
performed. For example, termination liability at a point in time would
be higher if the contractor has an open order for an item or has
contracts with several subcontractors. After termination, the
contractor submits a termination settlement proposal to the
contracting officer and negotiates a settlement amount with the
contracting officer. The contracting officer may settle matters that
cannot be agreed upon.[Footnote 13] The FAR also provides the
contractor the right to appeal the termination settlement.[Footnote 14]
Lack of Detailed Instructions, Guidance, and Training Have Contributed
to Varying Termination Liability Practices within NASA:
NASA's policy regarding termination liability is to rely on the FAR's
limitation of funds clause, which provides that termination costs are
subject to the limitation of funds amount in the contract, and in the
event of a termination, the maximum amount NASA would be obligated to
pay are the funds allotted to the contract. NASA's acquisition
professionals do not generally track the contractor's potential
termination liability nor are they required by the FAR to do so. In a
1997 memorandum, its most recent on the subject, NASA reiterated its
position that in accordance with the FAR, potential termination costs
are subject to the limitation of funds amount in the contract. The
agency, however, has not provided detailed instructions, guidance, or
training to its acquisition professionals on how to put into practice
the FAR's limitation of funds clause and its impact on the funding of
a contractor's potential termination liability.[Footnote 15] As a
result, agency acquisition professionals inconsistently monitor and
fund potential termination liability across the projects we reviewed.
For example, resource analysts and financial managers for some of the
projects we reviewed reported varying practices for how and whether
they fund potential termination liability on their contracts, based on
funding available, contractor demand for it to be covered, and past
practice. Comments from these acquisition professionals include the
following:
* One told us that in her 20 years working on NASA projects, she has
never seen potential termination liability funded.
* Another stated that NASA does work with the contractor to ensure
that its termination liability is funded.
* A third told us that the contractor requested and did not receive
funding for potential termination liability because the funds were not
available. He noted that for the agency to ensure that termination
liability funding is continuously available as a practice would result
in millions of dollars unavailable for performance-related costs and
would be unproductive and very unlikely to be done. The official said
that while it is not a written policy at his NASA center, not funding
potential termination liability might be an "informal" agency policy.
In most cases, however, the official noted that project officials
would have ample warning that a project could be terminated and could
begin to identify the necessary funding to cover any potential
termination liability as needed.
Among other responsibilities, resource analysts and financial managers
review and track the NASA Contractor Financial Management Reports
(NASA Forms 533M and 533Q)[Footnote 16] that may include information
related to potential termination liability. The reports are required
for all cost type, price redetermination, and fixed-price incentive
contracts when certain dollar and period of performance criteria are
met, and generally include information on the contractor's incurred
and anticipated costs. For the contracts we reviewed, NASA does not
require the contractors to report their potential termination
liability on these reports. Though not required to do so by NASA,
three of the contractors in our sample voluntarily report potential
termination liability on these forms, but the resource analysts and
financial managers we interviewed said they do not question the
information on potential termination liability that is reported.
NASA contracting officers, who are charged with effectively managing
their contracts and safeguarding the interests of the government, said
they generally assumed that contractors accounted for their potential
termination liability through the funding increments the agency
allocates to contracts, and therefore the contracting officers do not
regularly request or track the information. According to NASA
officials, the FAR's limitations of funds clause places the
responsibility on the contractors to track and manage their individual
potential termination liability. Contractors are to keep NASA apprised
of their funding needs through the notification mechanism established
in the contract's limitation of funds clause. That is, when the
contractor expects that the costs it will incur in the next 60 days of
performance will exceed 75 percent of the total amount allotted to the
contract, the contractor must notify the agency of the estimated
amount of funds required to continue performance under the contract or
for any further period specified in the contract's schedule. In some
cases where the contractor requested additional funding, the NASA
contracting officers reported that they assume the contractors are
taking into account potential termination liability when estimating
expected costs, but they are not actually aware of whether the
contractors included potential termination liability in estimates.
According to an official in the agency's Office of Procurement, NASA
prefers to avoid the perception that it has any role in managing or
responsibility for separately funding termination liability costs.
Agency officials told us that not only does the agency not provide
instructions to its acquisition personnel, but it also does not
provide guidance to contractors either to ensure that they have
adequately estimated their potential termination liability costs or
accounted for this contingency in their funding profile, limitation of
funds notifications, or estimated cost figures. Accordingly, for our
sampled contracts, we found no evidence that NASA contracting officers
have given guidance, formal or informal, to its contractors on whether
or how to manage potential termination liability. Since contract
terminations occur infrequently--for less than 0.2 percent of the
contracts for fiscal years 2006 to 2010--at NASA, termination
liability has not generally been perceived as a large risk.
Contractors Continued to Perform Work Regardless of Whether Potential
Termination Liability Was Funded:
Several contractors interviewed for this report and Constellation
program contractors interviewed for prior GAO work[Footnote 17] said
that NASA's past practice when a contract was terminated was to pay
agreed-upon termination settlement costs even if they exceeded the
amount currently allotted to the contract under the limitation of
funds clause. The contractors said they had expected this practice to
continue. Some of the contractors asserted that NASA stated in various
written and oral communications that the agency would reimburse such
costs. The contractors further said that NASA's behavior during
contract performance also indicated that NASA would reimburse such
termination settlement costs. One contractor wrote in a 2010 letter to
NASA that it "historically operated with the understanding that NASA,
in the event of a termination of the (current)…program, would provide
termination liability funding above and beyond those funds regularly
provided to cover ongoing program activity…This understanding is
consistent with the mutual approach employed on previous NASA
programs..." Representatives of another contractor told us that the
company sought reassurance from NASA in 2010 that it would be paid for
potential termination costs in the event of termination, even if the
funding had not been part of the most recent funding allotment, as it
had been assured in a 2002 letter from NASA regarding a different
contract. Due to past practice, they did not take steps to ensure that
the funds that NASA allotted to the contract would be sufficient to
reimburse any costs that may arise under the contract in the event of
termination. Instead, both of these contractors reported that in the
past, they would incur performance costs up to the amount that NASA
had allotted to the contract, without leaving any of the allotted
amounts available for potential termination liability.
For many of the contractors we interviewed, potential termination
liability was not a major concern. For six contracts, the contractors
reported that their termination liability estimates were either
covered through their funding allotments from NASA, or were very low
due to the advanced stage of the project. On two contracts, the
contractor reported that it did not track potential termination
liability. One contractor reported having the estimate covered
initially and then not having it covered when NASA temporarily de-
obligated contract funding. Another contractor reported that because
of uncertainties surrounding the fiscal year 2011 appropriation, NASA
at times has not been allotting sufficient funds to cover its
potential termination liability.
In two cases where contractor representatives were concerned about
potential termination liability funding, they indicated that they did
not consider funding required for termination liability costs a
significant enough risk to warrant stopping work on the contract. For
the projects we examined, contractors did not stop work in order to
account for potential termination costs, even in cases where it was
clear that estimated termination liability was not covered in funding
allotments. For example, in one case, the contractor explicitly
reported its termination liability estimate to NASA in addition to its
estimated contract performance cost. NASA, however, did not fund the
estimated termination liability and said that all available funding
was needed to complete work under the contract. The contractor
continued to work, nonetheless. This contractor has requested a
special termination clause that would ensure that any agreed-upon
termination liability costs would be paid in the event of a
termination. As of May 2011, NASA has not approved this request.
Another contractor representative reported incurring costs in excess
of 99 percent of the funding allotment when seeking the next funding
allotment for an ongoing program, leaving a fraction of 1 percent of
allotted funds to cover potential termination costs. According to a
project resource analyst, the contractor informed NASA that it was
unwilling to continue to work without sufficient funding for potential
termination liability as it had on previous projects. As a result,
NASA has taken steps to ensure that the funding allotments to this
contractor are sufficient to cover the contractor's estimated
termination liability.
One high-level NASA acquisition professional observed that contractors
have little to gain from stopping work if potential termination
liability is not covered. If it appeared that potential termination
liability costs would not be covered to the extent a contractor
estimated, NASA would cite the limitation of funds clause as the
limitation of NASA's liability and it would be up to the contractor to
decide how to proceed--whether to stop work so that funding allotted
to the contract would be available in the event of a termination.
According to the agency official, the contractors would be more likely
to benefit by continuing to work. The agency official said contractors
are not expected to provide precise termination liability cost
estimates in each funding request. Instead, according to the agency
official, contractors should make an assessment of the risk of
termination, factor that into the estimate of termination liability,
and build that into the contract funding request. As the risk of
termination grows, contractors would likely reserve more of the
contract's allotted funds to cover potential termination liability. If
risk of termination is deemed very low by the contractor, then the
amount of the allotted funds that the contractor reserves for
termination liability may be very low. According to this official,
trouble occurs when the contractor's assumptions about termination
risk do not change as quickly as the government's, as was the case
with the proposed cancellation of the Constellation program last year.
In these situations, the contractor may find itself exposed to
financial risk on the contract if there are sudden requirement changes
by the government and potential estimated termination liability costs
are not fully accounted for in the funds currently allotted to the
contract. According to the agency official, such changes could make it
difficult to do meaningful work on the contract and account for the
potential termination liability at the same time.
Fiscal Limitations May Lead to Reductions in NASA's Project Portfolio:
The federal government currently faces real fiscal limitations and
will have to make difficult choices about upcoming priorities. This
reality makes it more important than ever that NASA manage its
programs and projects as efficiently and effectively as possible and
within a budget that over recent years has remained relatively
constant. NASA's future budgets are projected to remain flat, and this
requires that NASA make tough decisions about which projects to fund
among its science, aeronautics, and human space flight and exploration
missions. Our work over the past 3 years has shown that NASA's major
projects are frequently approved without evidence of a sound business
case--ensuring a match between requirements and resources--and
therefore often cost more and take longer to develop than planned. For
example, our March 2011 assessment of NASA's major projects found that
13 projects we reviewed over the past 3 years that established
baselines prior to 2009 experienced an average development cost growth
of almost 55 percent, with a total increase in development costs of
almost $2.5 billion from their baselines established at their
Confirmation Review.[Footnote 18],[Footnote 19] All but 4 of these 13
projects experienced significant cost growth of 15 percent or more.
Additionally, we reported that development costs for the 16 projects
currently in implementation had an average development cost growth of
$94.3 million--or 14.6 percent--and schedule growth of 8 months from
their baselines. NASA has taken steps to improve its acquisition
management through several initiatives aimed at cost estimating and
management oversight and some newer projects are maintaining recently
established cost and schedule baselines. If challenges persist as they
have in the past, NASA may be forced to delay or cancel projects in
its portfolio in order to fund higher-priority projects. As a result,
more of NASA's contractors may perceive contract termination as a
greater risk in the future and may be less willing to continue
contract performance without full funding of their estimated potential
termination liability.
Conclusions:
NASA's lack of specific instructions and guidance for implementing FAR
clauses that affect termination liability has contributed to
inconsistent practices for funding and monitoring potential
termination liability. In addition, NASA's contractors have different
interpretations of their risks and financial responsibilities related
to potential termination liability, which may be due in part to NASA's
inconsistent practices. These differences could have negative
consequences for NASA's long-term relationships with its contractors
if the agency decides to terminate a major project. As the data we
examined show, contract terminations at NASA have been rare, but it is
not clear that this trend will continue given the nation's goal of
cutting the federal deficit and reducing federal spending. NASA may
need to reassess its portfolio and terminate more projects than it has
historically in order to afford its more pressing priorities if cost
and schedule growth for NASA's major projects persists. Reviewing its
policies and practices concerning termination liability funding would
allow the agency to better position itself to fulfill its mission by
providing a better understanding of potential termination costs that
could have a significant impact on its portfolio of projects.
Recommendation for Executive Action:
We recommend that the NASA Administrator review how the agency's
acquisition professionals monitor potential termination costs and
establish guidance as appropriate to ensure consistency across the
agency. The agency should ensure that the guidance it develops
provides instructions to acquisition professionals on adequately
addressing potential termination risks on their contracts, and on how
potential termination costs would be funded in the event of a
termination.
Agency Comments:
We provided a copy of the draft report to the NASA for comment and the
agency agreed with our overall findings and concurred with our
recommendation. In its comments, the agency stated that guidance
should be offered to acquisition professionals on adequately
addressing termination risks, including reminding them of the purpose
for the Federal Acquisition Regulations (FAR) 52.232-22 Limitation of
Funds clause in NASA contracts. NASA's written comments are reprinted
in enclosure II. NASA also provided technical comments, which were
incorporated as appropriate.
We are sending copies of this report to NASA and interested
congressional committees. We will also make copies available to others
upon request. In addition, the report will be available at no charge
on GAO's Web site at [hyperlink, http://www.gao.gov].
If you have any questions about this report, please contact me at
(202) 512-4841 or chaplainc@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff members who made key contributions to
this report are listed in enclosure III.
Signed by:
Cristina T. Chaplain:
Director, Acquisition and Sourcing Management:
Enclosures - 3:
[End of section]
Enclosure I: Scope and Methodology:
To assess the National Aeronautics and Space Administration’s (NASA)
policies and practices pertaining to the management and funding of
contract termination liability, we identified all NASA projects that
were in the development phase and had active contracts. Since such
projects were still in development, they represented potential
termination costs to NASA. Specifically, we selected 13 projects from
NASA’s Science Mission Directorate because this directorate has the
largest number of projects in development. We eliminated all projects
managed by the Jet Propulsion Laboratory because it is a federally
funded research and development facility managed for NASA by the
California Institute of Technology. We excluded major projects in the
Exploration Systems Mission Directorate, such as Orion and Ares I,
because we had previously reported on the contracts associated with
Constellation program.[Footnote 20] For the remaining 13 projects, the
majority of which are managed out of Goddard Space Flight Center, we
collected and analyzed 14 primary contracts.[Footnote 21] We collected
Contractor Financial Management Reports and funding modifications from
fiscal year 2010. We obtained and analyzed a variety of documents,
including e-mails and correspondence, regarding potential termination
liability from NASA and the contractors for the selected contracts.
Also, we interviewed NASA contracting officers and representatives for
each of the contracts selected. We developed a standard set of
questions for both contracting officers and contractors to identify
the practices that NASA uses to manage termination liability, and if
its policies and practices are implemented consistently across the
selected contracts. We interviewed financial managers and resource
analysts to determine how they assess a contractor’s potential
termination costs when funding contracts. In addition, we interviewed
NASA termination contracting officers at each of the NASA centers that
have such a position to determine the center level perspective on
practices concerning termination liability and contract terminations.
We interviewed agency level procurement officials to obtain NASA
headquarters’ views on the agency’s policies regarding termination
liability. We also relied on interviews conducted in our previous work
on the proposed termination of the Constellation program. In addition,
we reviewed the FAR, NASA FAR supplement, and agency policies to
identify the requirements for managing termination liability. We
analyzed the primary contracts for the same 13 selected NASA projects
to determine if the contracts included the appropriate FAR clauses,
either the limitation of funds or the limitation of cost clauses, for
the contract type. We also determined whether the selected contracts
contained any special termination clauses.
To determine how many contracts NASA has terminated for default
[Footnote 22] or convenience, we extracted the data from the Federal
Procurement Data System-Next Generation (FPDS-NG). We limited our data
to fiscal years 2006 to 2010, because the data prior to this timeframe
were incomplete within the FPDS-NG. We further limited the contracts
examined to those with a value over $25,000. From this universe, we
determined how many contracts or orders were terminated by fiscal year
and whether they were terminated for default or convenience, and the
type of contract. If the contract or order was terminated, we tracked
the contract number into future years in order to determine whether
the contract was completely or partially terminated. We assessed the
risks associated with NASA having more or fewer terminations than
those recorded in FPDS-NG and found that less than 1 percent of all
contracts and orders are terminated within each fiscal year.
Therefore, we determined that if there were several more or less
terminations, it would have a negligible effect on our assessment that
terminations at NASA are a rare occurrence. In addition, we
corroborated the results of our data analysis by interviewing NASA
contracting officers to determine if terminations were a common
occurrence and were told that terminations were extremely rare. We
found the FPDS-NG data to be sufficiently reliable for an overall
trend analysis on contract terminations.
Our work was performed primarily at NASA headquarters in Washington,
D.C., and at NASA’s Goddard Space Flight Center in Greenbelt,
Maryland, where the majority of our selected projects are managed. We
also spoke with NASA officials at Marshall Space Flight center in
Huntsville, Alabama; Dryden Flight Research Center at Edwards Air
Force Base, California; Johnson Space Center in Houston, Texas;
Langley Research Center in Hampton, Virginia; Kennedy Space Center in
Florida; and the NASA Management Office in Pasadena, California.
We conducted this performance audit from July 2010 to July 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Enclosure II: Comments from the National Aeronautics and Space
Administration:
NASA:
National Aeronautics and Space Administration:
Headquarters:
Washington, DC 20546-0001:
July 5, 2011:
Reply to Attn of Office of Procurement:
Ms. Cristina Chaplain:
Director:
Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Chaplain:
The National Aeronautics and Space Administration (NASA) appreciates
the opportunity to review and comment on the Government Accountability
Office (GAO) draft report entitled, "NASA Needs to Better Assess
Termination Liability Risks and Ensure Consistency in its Practices"
(GAO-11-609R). NASA considers termination liability to be an important
issue and greatly values the constructive information and insights
shared by GAO during the course of this effort. We further appreciate
the extreme professionalism demonstrated by your review team and the
continued open communication maintained between GAO and NASA.
In the draft report, GAO addresses one recommendation to the NASA
Administrator (see below). In addition to directly responding to the
GAO recommendation, our office provided information and clarification
on key points at the exit conference on May 25, 2011.
Recommendation: We recommend that the NASA Administrator review how
the agency's acquisition professionals monitor potential termination
costs and establish guidance as appropriate to ensure consistency
across the agency. The agency should ensure that the guidance it
develops provides instructions to acquisition professionals on
adequately addressing potential termination risks on their contracts,
and how potential termination costs would be funded in the event of a
termination.
Management's Response: NASA concurs with the GAO's recommendation. We
fully agree that guidance should be offered to acquisition
professionals on adequately addressing termination risks.
Specifically, NASA will remind acquisition professionals of the
purpose for the Federal Acquisition Regulations (FAR) 52.232-22
Limitation of Funds clause in NASA contracts. The Limitation of Funds
clause caps the Government's potential liability to that amount
allotted to the contract by the Government. As the Government is not
obligated to reimburse the contractor in any amount in excess of the
funds on the contract, contractors should stop working when incurred
costs plus the Government's termination liability reach the total
amount funded.
FAR 52.232-22 Limitation of Funds (April 1984):
"f) Except as required by other provisions of this contract,
specifically citing and stated to be an exception to this clause--
(2) The Contractor is not obligated to continue performance under this
contract (including actions under the Termination clause of this
contract) or otherwise incur costs in excess of--
(i) The amount then allotted to the contract by the Government....
h) No notice, communication, or representation in any form other than
that specified in paragraph (t)(2) of this clause, or from any person
other than the Contracting Officer, shall affect the amount allotted
by the Government to this contract. In the absence of the specified
notice, the Government is not obligated to reimburse the Contractor
for any costs in excess of the total amount allotted by the Government
to this contract, whether incurred during the course of the contract
or as a result of termination."
Potential termination liabilities (PTL) will be addressed by
continuing to ensure that PTL is factored into project Budget
Authority profiles. Managing PTL does not increase the cost of a
contract; if the contract terminates early, then there is some
additional cost above the normal termination costs, but the overall
cost will always be less than completing the contract. For
contractors, however, management of PTL requires more budget authority
allocated to the contract up front so that they can manage both the
work content and the potential for termination. Thus, contractor
management of PTL can change the budget authority profile (not the
cost profile) marginally over the span of the project.
In addition to the above response to the recommendation outlined in
the draft report, we have also provided technical comments to the
draft report, including proposed revisions and/or corrections of
factual inaccuracies, etc. Our technical comments to the draft report
were provided to the GAO via e-mail on June 10, 2011, in order to
facilitate the GAO's technical correction process.
Thank you for the opportunity to comment on this draft report. If you
have any questions or require additional information, please contact
Diane Thompson, Procurement Analyst, at (202) 358-0514.
Sincerely,
Signed by:
William P. McNally:
Assistant Administrator for Procurement:
[End of section]
Enclosure III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Cristina T. Chaplain, (202) 512-4841 or chaplainc@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, Shelby S. Oakley, Assistant
Director; Noah B. Bleicher; Greg Campbell; Laura Greifner; Julia M.
Kennon; Kenneth E. Patton; Erin Preston; Jose A. Ramos; Carrie Rogers;
and Roxanna Sun made key contributions to this report.
[End of section]
Footnotes:
[1] Total NASA obligations include salaries, benefits and travel of
NASA employees, as well as credit card purchases.
[2] A contract is a mutually binding legal relationship obligating the
seller to furnish the supplies or services (including construction)
and the buyer to pay for them. An order means a task or delivery order
for services or supplies, respectively, placed against an established
contract or with government sources. FAR § 2.101
[3] GAO, NASA: Assessments of Selected Large-Scale Projects,
[hyperlink, http://www.gao.gov/products/GAO-11-239SP] (Washington,
D.C.: Mar. 3, 2011)
[4] The primary objective of the Constellation program was to develop
capabilities to transport humans to Earth orbit, to the Moon, and to
establish a stepping stone for eventual human space flight to Mars and
other destinations. GAO, NASA: Constellation Program Cost and Schedule
Will Remain Uncertain Until a Sound Business Case Is Established.
[hyperlink, http://www.gao.gov/products/GAO-09-844] (Washington, D.C.:
Aug. 26, 2009)
[5] GAO, National Aeronautics and Space Administration - Constellation
Program and Appropriations Restrictions, Part II, B-320091, July 23,
2010. We take no position regarding whether NASA ever promised the
Constellation contractors, explicitly or implicitly, that NASA would
reimburse contract termination costs even if they exceeded the total
amount allotted to the contract.
[6] Potential termination liability refers to an estimate of the costs
incident to stopping work on the contract in the event of termination
at a given point in time.
[7] This work is part of a broader effort underway to examine NASA's
management and oversight of its contractors. After the events
surrounding the President's proposed cancellation of the Constellation
program, we were asked to separately examine and report on termination
liability.
[8] Funds allotted refers to the obligation that NASA must record for
the entire amount that is allotted to the contract, which represents
NASA's legal liability, in order to comply with various fiscal
statutes.
[9] The allowable costs for a termination for default would differ
from those of a termination for convenience. For example, in a
termination for default the government would not be liable for the
contractor's costs on undelivered work and is entitled to repayment of
advance and progress payments, if applicable, and certain allowable
costs, such as contractor costs for preparing the settlement proposal
would not be included in the settlement. (See FAR Subpart 49.4 for
additional information on terminating contracts for default).
[10] FAR Subpart 31.2.
[11] Throughout this report we refer to both limitation of funds and
limitation of cost clauses as limitation of funds, because the
limitation of funds clause was the one most commonly included in the
contracts we reviewed.
[12] FAR § 52.232-22.
[13] If the contractor and contracting officer cannot agree on a
termination settlement, or if a settlement proposal is not submitted
within the period required by the termination clause, the contracting
officer will issue a determination of the amount due to the contractor
consistent with the termination clause.
[14] For additional information on termination costs and settlement
amounts see GAO, Defense Acquisitions: Termination Costs Are Generally
Not a Compelling Reason to Continue Programs or Contracts That
Otherwise Warrant Ending, [hyperlink,
http://www.gao.gov/products/GAO-08-379] (Washington, D.C.: Mar 14,
2008).
[15] By "funding" termination liability, we are referring to reserving
part of a contract's allotment of funds exclusively for potential
termination costs instead of using the full allotment to reimburse
performance costs.
[16] NASA Procedural Requirement 9501.2D - NASA Contractor Financial
Management Reporting.
[17] B-320091, July 23, 2010.
[18] [hyperlink, http://www.gao.gov/products/GAO-11-239SP], 12-14.
[19] The confirmation review, which generally refers to key decision
point C in NASA's acquisition management process, is the point at
which cost and schedule baselines are confirmed. Project progress is
measured against these baselines.
[20] B-320091, Jul 23, 2010.
[21] The Landsat Data Continuity Mission project has two primary
contracts.
[22] We used the term termination for default to describe both
terminations for default or terminations for cause. Terminations for
default generally refer to contracts for noncommercial items, and
terminations for cause generally refer to contracts for commercial
items terminated for performance-related reasons.
[End of section]
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